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Gold set a new record high this week, and as this market and other precious metals move higher, it tends to bring a lot of the critics out of the woodwork. The words bubble and overbought become linked to the markets in news headlines. There are probably plenty of analysts who are eager to be the ones to call a reversal in these markets, but I am here to remind you of all the things that are likely to support gold and silver in the coming months.

Past performance is not indicative of future results.***chart courtesy of Gecko Software

The first thing to keep in mind is that gold and silver are far from being tarnished in the eyes of investors. Any reason for a strong sell off goes out the window when you take a look at the strong domestic and international demand for precious metals since 2008. The economic collapse and a lack of significant recovery have helped remind investors why metals are an option. They cannot be manipulated or undermined by one central bank or nation’s actions. Growth in investment demand was led by the explosion in ETF participation and is currently being fueled by expansion in China and India. The growth in developing industrial nations was sparked by disposable incomes allowing people to buy more jewelry – now it is led by people looking for a place to invest for asset preservation.

The growing middle class in both areas has been picking up the demand slack any time there is a significant pulling of interest from Europe or the US. The quarterly reports from the World Gold Council have shown that in action whenever ETF positions are pulled, or other holdings liquidated. What’s interesting is the current debt wrangling on both sides of the Atlantic, and how that might propel western and eastern alike into haven holdings. That is where precious metals markets are likely to find the next layer of support.

It used to be that the euro and US dollar were in a seesaw way with each other, one rising while the other fell. Since gold and silver are priced in US dollars, its strength spelled precious metal weakness. The debt contagion in the European Union and the debt ceiling issue in the US have spelled out one thing in big letters to all investors – there are no guaranteed winners in this situation. Both currencies are weakened and both areas are struggling with the burden of trying to balance inflation fears with the risk of stunting recovery. The European Central Bank opted to raise interest rates modestly (and the Federal Reserve may do the same), but there are no guarantees as members are still toying with the idea of additional stimulus. That means the potential for another round of quantitative easing will be on investor’s minds, propelling them towards the one hard currency they see – gold.

And inflation risks? They are definitely another potential supportive catalyst for price movements higher. China and India are already waging a battle with price increases, and that makes precious metals attractive there as a potential inflationary hedge. In the US, I can only imagine how gold and silver prices would react if the Fed felt moved to more stimulus. It might make $1,600 an ounce look like a value buy.

Think that sounds crazy? Even central banks have been reluctant to sell their gold as of late, with big names like Russia becoming net buyers. Even if you are among the faction who believes gold is just a simple commodity being pushed and pulled with the force of speculative interest, you have to acknowledge that supply and demand fundamentals present another potential layer of support. There are only so many mines at present, and it is not likely that a huge strike will be found to flood us with fresh supplies. Such discoveries certainly undermined the price of gold and silver in the past, but I don’t see that being a current threat. A genuine supply boost would come if a bank or other major holder decided to sell. Most of the big players agreed not to either by direct signature or association with the Central Bank Gold Agreement which caps gold sales. But as I see it, a big bank deciding to sell at this juncture wouldn’t be a big bear flag. Any reason to liquidate gold right now would probably be motivated by a push to raise money, and that kind of signal would underscore a bigger financial issue. Just like the debt problems, a fire sale on precious metals reserves would probably just add fear premium to the markets

Summary

There will probably be a genuine round of profit taking with every step higher in gold and silver prices. When these markets break fresh psychological price thresholds, there is always a reason to shake some longs loose. The real support for these markets comes from the intrinsic value that investors are seeing despite those dips lower. For every seller at these prices another buyer appears. With so much financial chaos in the air, I see no reason why gold and silver can’t reach for loftier heights.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.